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World’s Most Important Bond Market Is Stuck in a Fed-Induced Rut

(Bloomberg) -- Traders in the $13.5 trillion Treasuries market may as well just stay home for the next two days.

Treasury 10-year notes are stuck in their tightest monthly trading range in a decade as investors await Federal Reserve Chair Janet Yellen’s speech on Friday for clues to the path of interest rates. The yield hasn’t closed above 1.6 percent since June 23, the day the U.K. voted to leave the European Union. Investors turned even more neutral on Treasuries in the week ended Aug. 22, with both long and short positions declining, a JPMorgan Chase & Co. survey showed.

"It’s the boring part ahead of Yellen," said David Keeble, New York-based head of fixed-income strategy at Credit Agricole SA. "The Fed can control the short end to some extent --that control has lessened with each promise they’ll hike which hasn’t been fulfilled. But if Yellen does give a firm signal we’ll get a rate hike fairly soon, perhaps September or December, we’ll definitely react.”

The Fed chief is scheduled to speak at an annual symposium in Jackson Hole, Wyoming, on Aug. 26, at a time when Vice Chairman Stanley Fischer and other Fed colleagues have stated that interest rates may still rise in 2016. Fed officials are trying to balance their desire to hike this year, following liftoff from near zero in December, with longer-term concerns that slowing global growth may prevent the policy rate from rising to levels seen in previous economic cycles.

The Treasury 10-year note yield rose one basis point, or 0.01 percentage point, to 1.55 percent as of 1:16 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 99 1/2. The yield has been in a range of 15 basis points this month, the narrowest on a closing-price basis since February 2006.

Fed Outlook

There’s about a 52 percent chance the Fed will increase rates this year, up from a 36 percent probability seen at the end of July, according to data compiled by Bloomberg based on fed fund futures.

“It’s a wait-and-see kind of mode for Treasuries,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate and investment-banking unit in London. The 1.60 percent level for 10-year yields “seems to be an area where the market can’t seem to break through,” he said. “It may need something a little bit stronger from Yellen.”

The U.S. on Tuesday sold $26 billion in two-year debt, the coupon securities most sensitive to Fed policy, in the first of three fixed-rate note sales this week. The August 2018 notes yielded 0.76 percent, in line with the 0.76 percent yield at the previous two-year debt sale July 25.

The Treasury will sell $34 billion of five-year securities on Wednesday and $28 billion of seven-year debt a day later, in addition to a $13 billion offering of two-year floating-rate notes Wednesday.